Constitutions Matter: The Case of Massachusetts
By David Henderson
Sometime in the next 24 or so hours, I’ll give my thoughts on the latest tax and budget deal between Congress and President Obama. I find that one’s first thoughts are not typically one’s best. There’s a lot to digest. What I can say at this point, though, is that, given the constellation of political forces, it was not a bad deal except for the delaying of the sequester, the one serious attempt we’ve had in the last few years to cut discretionary spending.
There is one item in Scott Sumner’s post, though, that I think is way off and that I want to comment on. Scott writes:
Have you ever noticed that many ultra-conservative southern states have steeply progressive state income taxes, whereas Massachusetts has a 5.3% flat tax, and liberal Washington State has no income tax at all. Watch what they do, not what they say.
I don’t know enough about Washington state. But I do know about Scott’s state of Massachusetts. What Scott doesn’t seem to realize is that Massachusetts’ flat tax rate is mainly the result of political forces 200 years ago, not political forces today. The flat tax rate is due to the Massachusetts Constitution. I wrote about this briefly in 1997. Here’s the relevant part:
Article XLIV. Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonable exemptions and abatements.
In other words, Massachusetts has a flat tax rate on income because the Constitution requires that any tax rate be a flat rate.
But the desire to take more from “the rich” is strong in Massachusetts as elsewhere. How does the Massachusetts legislature get around this limit? By having a much higher tax rate–12 percent–on short-term capital gains. The rate, as required by the Constitution, is the same for people at all income levels. But who do you think gets a disproportionately high share of their income in the form of short-term capital gains? That’s right: high-income people.
The bottom line: the Massachusetts Constitution, not the legislature of Massachusetts, should get credit for Massachusetts’ flat-rate tax.